Sunday, March 19, 2017

Defense Fees, Loss Cost, and More

I recently had the opportunity to discuss Worker's Compensation with an attendee at a legislative meeting. The attendee explained to me a perception that Worker's Compensation insurance companies in Florida defend worker's compensation cases too extensively. This attendee perceived that there is a tendency to fight "tooth and nail," and that this behavior is incentivized because insurance carrier's "can just recoup all of their defense attorneys fees through increased insurance rates." This conversation was stimulated by the criticism that has been periodically levelled regarding claimant attorney fees in Florida. 

I found this perception intriguing. Early in my career I was told that insurance companies in Florida cannot include defense fees in their rate-making calculations. Insurance rates in Florida Worker's Compensation include several components. One is the "loss-cost," which is the money spent on care and compensation for the injured worker. These are the actual losses directly resulting from an injury or accident.

In the Florida system, individual insurance companies can file for a Worker's Compensation rate with the office of insurance regulation. They are also allowed to aggregate they're filing, through a trade group or association. As a result, the majority of carriers accept the rate that is calculated and filed for by the National Council on Compensation Insurance (NCCI). One apparent benefit of this to various carriers is avoiding the expense of evaluating the various losses, calculating, and perhaps defending their proposed rate.

There was an Actuarial Peer Review performed in December 2015, which is very informative regarding the "Rate Making Processes" in Florida workers' compensation. 

The report from that review notes that rate-making includes "methodologies, thought processes, judgments, and assumptions." The processes are applied to "over 500 individual . . . employer classifications." This results in a rate determination for a particular employment (occupation), which is then modified for each specific employer based on that business' individual past experience, called an "experience modification." Businesses that have fewer claims, less severe claims, pay less for workers' compensation than businesses in the same occupation that experience significant losses. 

The report says that the process of determining a rate change involves four steps. The first of these is to calculate the rate change for a particular year as follows:
The statewide rate change is the average rate change for all classifications combined. This step relies primarily on Aggregate Financial Call data. Contributing elements to the statewide rate change include, but are not necessarily limited to: 
Loss Experience: Is the actuarial forecast of the final cost of benefits for a group of claims greater than or less than what is expected in current premium rates? 
Trend: Are benefits increasing at a rate greater than or less than wages? 
Benefit Changes: Have there been any changes to workers compensation benefits since the prior rate examination? 
Claim Adjustment Expense (LAE): Is the expected cost of LAE greater than or less than the provision in current premium rates? 
Other Insurance Company Expenses: Is the expected cost of insurance company expenses greater than or less than provisions in current premium rates? 
Taxes and Assessments: Is the expected cost of taxes and assessments greater than or less than the provisions in current premium rates?  
Profit and Contingencies: Is the economic/actuarial forecast of reasonable insurance company profit greater than or less than the provision in current premium rates? 
According to the Actuarial Peer Review, the LAE is a broadly inclusive category of "adjustment expenses" for the "total cost of adjusting claims, including overhead costs of maintaining a claims adjustment staff and claim defense costs." The Review says that "claim defense costs generally include, but are not limited to, legal fees, court fees, and the cost of investigations." 

Seemingly, whether a particular carrier filed its own individual request for approval of workers' compensation rates, or whether it relied on NCCI or some other actuarial cooperative to do so, the process described in the Review would be similar. That may be interesting as system constituents discuss whether Florida should retain its current system of setting workers' compensation rates, called "administered pricing" in a recent WorkCompCentral article, or whether it should move to a "loss cost" system that has gained favor in other states. 

Some contend that the "loss cost" system would not produce significant change. They explain that in such a process it remains probable that either NCCI or some entity similar to it would continue to aggregate data from multiple payers (carriers or self-insured employers) to determine that element of the workers' compensation rate. The aggregated loss cost filing process is said to be at work already in the majority of those states that have adopted "loss cost." 

So, the contention that insurance carrier's "can just recoup all of their defense attorneys fees through increased insurance rates" might be viewed with two perspectives, in light of the Review's illumination and explanation of the process. 

First, the money that an insurance carrier spends on defense attorneys and investigators is included in the analysis of what the insurance rates should be. 

Second, in the current Florida system, individual insurance carriers are not including their individual LAE in the rate calculation. Instead, the carrier industry's overall experience is being calculated and included by NCCI in an overall LAE component of a rate for all carriers that have elected to be included in the NCCI process. 

Returning to the Loss Cost versus Administered Pricing discussion, most states are in the Loss Cost category. Critics of Florida's Administered Pricing contend that its use of averages provides an identical rate to all carriers participating. One attorney quoted in the WorkCompCentral article noted that "Some [insurers] are efficient and non-litigious, and others deny every claim, pay huge costs to defend, have highly salaried staff at the upper levels and generally do a poor job of claims handling." The implication is apparently that aggregating LAE facilitates or allows inefficiency. 

That attorney asserted that "NCCI averages the costs to suggest setting rates that will return a profit to even the worst carriers." On this basis, advocates of Loss Cost argue that calculating the rate individually for each carrier would remove the industry "averaging," and the rate market would become more affected by individual carrier's decisions about management of claims in a broad sense. This is an argument that competition in the rate market would perhaps change how carriers make decisions. 

The implication from the Review, and the discussions of "loss cost" seems to support that averaging would remain for claims expenditures under a "loss cost" system. Perhaps the only elements in which there would be individualization of carrier rates would be in the categories of Claim Adjustment Expense, Other Insurance Company Expenses, Taxes and Assessments, and Profit and Contingencies? 

The decisions about how workers' compensation insurance rates are set will come from the Florida Legislature. It convened March 7 and will adjourn on May 5, 2017. Whatever it has passed will then proceed to the Governor's desk. And, there will be ample issues for the Legislature to discuss; workers' compensation reform is not the sole issue that is attracting attention this session. It will be interesting to watch the process and the outcome. 

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